Peter Nitschneider (iO Partners): The money’s there, but not the prices

Published: 01. 04. 2024

Last year was bad because people didn’t know how far it was to the bottom. They didn’t know if inflation would fall, or if interest rates would continue climbing. With fewer unknowns now, does it mean this year will be busier than last year?
Buyers and sellers are thinking ambitiously that everything will be fine after the summer is over. That we’ll be back to the good times because that’s when the expected rate cuts will happen. People who are paying high interest rates at the moment think it will be resolved after the summer. This could happen, but what if they don’t come down? There might be cuts of just 10 to 15 bps, which is not enough. It would be some relief and you could take it as a positive sign. But people would like rates to fall to 2% and that’s not going to happen. Still, right now I see optimism and I see people preparing for acquisitions, saying “we just need to survive until after the summer.”

That sounds like you’re seeing people who are under pressure.
They are under pressure, though it’s not talked about very much. In poker you don’t admit you have a bad hand. But banks are quite busy now dealing with clients. Last year was mostly about debt service cover ratios. This year it’s starting to be about values as well because we’ve seen less trading, so there’s more pressure on valuations. Where is the right value? How do you justify this value? If the value is still acceptable for the bank now, will the bank take further steps if it isn’t in the future?

How do you find conversations with people in London when you tell them where CEE yields are?
They say ‘you must be out of your mind’! At the iO Partners launch party in Bratislava (November 2023), we brought some people over from the London JLL office and confronted them with prices here, compared to Canary Wharf where you have office buildings on the market currently for 10+%. Canary Wharf may not be considered the best office location these days, with lots of corporations moving to central London. And it’s true, most of the buildings there were built at the same time with no ESG element, so tenants are leaving. Still, comparing London office with 10%+ yield with Prague / Bratislava office yield of 6% looks very weird.

But this only supports what we’ve been seeing: international capital isn’t focusing on CEE because they have their own issues in their core markets. Here, local investors are raising capital, they understand the markets and they can underwrite the property better than someone who is based far away.

Are you seeing any investors here looking at ‘inexpensive’ western markets?
It’s tough for local capital to go to London and buy buildings because they don’t know those markets well. They know they can easily get burned and they’re too small for those markets. If you raise €100 million here in CEE, you’re well-recognized. In the UK, you’re just one of hundreds.

At first sight it’s an attractive market, of course and they’re looking at other markets. But they know things can turn against you if you don’t have the right people or partner. Then you’re left trying to manage it from here. They want to have their investments under direct control. The golden rule is: invest in what you know.

You’re not expecting much movement until after the summer?
I already see activity, there are discussions about where the real price of an asset is. There’s still a gap between the expectations of the buyers and sellers. But the capital is there and ready to engage for the right product with the right price tag. There are new players who are preparing and raising the capital to be ready, once pricing is ok.

Where does that leave you? What will you focus on in the coming months and year?
I see there’s still demand from occupiers for industrial space and for offices. There’s continuous activity there, even if it’s still down from what it was before. There are lease transactions happening, which is important. We see much less construction at the moment so whatever vacancy we now have in offices will go down. On the capital markets side, we see a lot of activity by large corporates focusing on cost savings. They’re trying to negotiate rent discounts or other savings due to the increase in their energy or finance costs. If they’re operating in owned properties, we are advising them to consider sale and leasebacks, as they can release capital from the sale of their property and commit them to pay rent instead. With this approach they can raise additional capital they can use within their core business or they can further invest.

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